Impact Of Naira Devaluation On Economic Growth In Nigeria

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Impact Of Naira Devaluation On Economic Growth In Nigeria


This research critical examine the impact of Naira devaluation on economic growth in Nigeria. That without exchange rate, the exchange of goods and services among trading partners will be focused with a lot of problems which may virtually narrow it down to trade by barter. Thus exchange rate is also used to determine the level of output growth of the country.Nigeria is one such economy where demand for locally produced goods is at such a pitiful level. This makes it difficult for the exportation of such goods to the economies they were assumed to have from. As a result of the excess of import-over export Nigeria increase the cost of product and also result to inflation (cost push). By making the domestic currency relatively cheaper, local production and exportation of commodities is thereby encouraged. This will help solve unemployment problem and create a favorable balance of trade.This study made use of the ordinary least square (OLS) regression techniques in analyzing the impact of Naira devaluation on economic growth in Nigeria: 1980-2009.the battery test and also t-statistic table was carried out and our findings is that real exchange rate has significant impact on the economy which means that Naira devaluation have positive impact on the economy.

Chapter One

1.0 Introduction

1.1 Background of the Study

The early 1980s drove home a truth which had been emerging in the 1970s that the world economy was becoming increasingly unstable. The combined effects of the second oil shock, an associated recession in OECD countries, a prolonged slump in real commodity prices, the outbreak of debt crisis with all its consequences for developing economies access to world saving and the erosion by non-tariff barriers of previous trade liberalization put the balance of payment of many developing countries under great strain making imperative decisive policy responses (killick 1995). On the economic scene of Nigeria, ‘the oil boom(1973-74) affected not only the investment, production and consumption patterns of the country but also its socio-cultural valves, political aspirations, style of economic management and policies and programmes implemented (Olaniyan 1996). Massive investments were made into infrastructures with significant capital outlay for imported components. Industries were outward-looking such that the global crisis meant for them acute shortage of essential raw materials, capacity under-utilization and factory closures. The competitiveness of the agricultural sector was eroded by the overvalued exchange rate and investment was skewed in favor of ‘short-term highly profitable ventures such as construction, commerce and services sector at the expense of such productive sectors as agricultural and manufacturing which have long-term gestation periods creating structural imbalance within the economy. There was a growing desire for imported consumer’s goods and conspicuous consumption was the order of the day among the affluent. Capital assets were neglected and maintained culture virtually died out. And all this against the background of financial misappropriation in the public sector and concerted misuse of import licenses and overloading of invoices between many Nigerian businessmen and their overseas counter parts; the gross abuses and import and export tariff at many custom points; fraudulent money transfer overseas aided and abetted by many banking officials’ (Yesufu, 1996:1989). The compound effect of the above was fiscal crisis,

The Impact of Nigeria Devaluation on economic growth in Nigeriaforeign exchange shortage, balance of payment and external debt crisis, high unemployment rate and negative economic growth (Olaniyan, 1996).
The global economic crisis created an awareness in the OECD Government and the International Financial Institution (IFIs, consisting of the IMF and the World Bank) that ‘many past policy interventions were aggravating rather than easing economic problems in developing countries and needed to be reformed’. The World Bank response was the opening of a structural adjustment window while the IMF introduced (or revived in the case of the Extended Fund Facilities: the EFF) the structural statement fund (SAP) and Enhance Structural Adjustment Fund (ESAF) (Killick, 1995).

The first response of the Nigeria Government to the deterioration economic conditions in the country was to introduce some stabilization, austerity and counter-trade measures between 1982 and 1984. The Economic stabilization Act (1982) imposed more stringent exchange control measures and import restrictions supported by appropriate monetary and fiscal policies. In order to secure foreign assistance to solve its balance of payments problems, the government approached the IMF for a three-year extended facility loan in 1983. In line with its new policy however, the IMF introduced some conditions that must be met for the loan to be given- the much popularized ‘IMF conditionality’s’. These were sixty per cent devaluation in the national currency, rationalization in the size of the public services, trade liberalization and removal of petroleum subsidy. The Babangida government in a bid to capture the confidence of Nigerians and thus-secure for itself legitimacy, decided to throw the matter to the generally public. By public debate involving the learned and the unlearned who knew not so much as what the IMF is and what the conditionalties really meant by various expressions of public opinion encompassing both the professional and the street trader, Nigerians were to make their view known whether they wanted the IMF loan with its attached condtionalities or not. Of course, the Nigerian public rejected the loan. Barely one year after, however, in July 1986, had the government adopted an externally packaged structural adjustment program

The Nigeria Structural Adjustment program was designed to fit the standard IMF- World Bank structural adjustment package and meant to effectively alter and restructure the consumption and productive pattern of the Nigerian economy, as well as to eliminate price distortions and heavy dependence on the export of crude oil and import of consumer and producers goods’. (Anyanwa, 1993 p. 243). The programme was initially proposed as ‘an economic package deigned to rapidly and effectively transform the national economy’ over a period of less than two years (Yesfusu, 1996 p. 91)

Three factors were proposed as being the rationale for the adoption of SAP

  1. An excessive dependent by nation on imports, especially consumers’ goods including food.
  2. Almost total neglect of domestic production in all the five sectors of the economy: agriculture, industry, construction, commerce and transportation.
  3. Almost total dependence on earnings from oil exports alone boosting government revenues as well as for accumulated foreign exchange reserve.

The major negative fall-outs of the above were persistent balance of payment deficit (external imbalance) and huge fiscal deficits (internal imbalance).

The BOP problem was identified to be a consequence of the over-devaluation of the Naira. Under the SAP therefore, the exchange rate is to reflect the scarcity value of the national currency. The devaluation of the Naira would enhance the level of non-oil exports; discourage import thus reducing the nominal value of import while increasing the value of exports.

Also inflation is proving to be a persistent problem in Nigeria with significant, impacts on individuals, firms and governments, concern over resource limitations and dramatic prices increase for energy, food and other basic items are changing lifestyles, with resultant impacts on the market for many goods and services. These same factors are causing economic activities to by undergo rapid transformations, a situation compound by increasing importation of foreign goods and services into the economy. In such a setting, sound economic policies and analysis have taken on greater importance in economic field.

In a country like Nigeria she tries to bring quick economic growth. She has to import machinery, equipment’s, raw material and other technological know-how. In addition to the imports both visible and invisible account also increase, while export is lag behind this will position the balance of payment become deficit i.e. unfavorable. Such a nation has to adopt both short and long term measures to correct this disequilibrium in the balance of payments. Export promotion and import restriction are the two important measures to correct the deficit of balance of payment others include fiscal policy, monetary policy. The balance of payment deficit can also be adjusted by the use of naira devaluation policy.

The challenges of facing the Nigeria economy presently require the solution the devaluation can help provide. The government can use devaluation to boost aggregate demand in the economy in an effort to fight unemployment. Also the price of foreign currency increase which makes import dearer and export cheaper. This causes expenditure to switch from foreign to domestic goods as the country’s export rise and country produces more to meet the domestic and foreign demand for goods with reduction in imports. It reduces the foreign reserve which affects the economy in long run which leads to increase in unemployment and reduces the economy growth in the economy. With all this factors in mind the research aims at finding the impact of naira devaluation on economic growth in Nigeria.

1.2 Statement of the Problem.

YearGross Domestic Product (GDP)Gross Domestic Product GrowthExchange RateExchange Rate Growth
19962702719.11802855.921.8861     0
19982708430.95711.821.8861     0

Source: Central Bank Statistical Bulletin 2009.

From the table above, it show that in 1982 that GDP decreases by 563 as the exchange rate depreciate with 0.1265. The GDP increase from 1984 to 1992 as the exchange rate depreciates, in 1994 the GDP increase but exchange rate did not depreciate much (appreciation). However in 1994 to 1998 exchange rate is stable which also affected GDP to decrease from 1802855.9 to 5711.8. We observe that exchange rate has an inverse relationship with gross domestic product meaning that if exchange rate depreciates, GDP will increase and if exchange rate appreciates GDP will reduce.

From the foregoing analysis the research will be guided with the question.

  1. What is the impact of Naira Devaluation in Nigeria?

1.3 Objectives of the Study

The major objective of this research is to determine the impact of Naira devaluation on economic growth in Nigeria.
The others objectives includes

  1. To determine the effect of Naira and relative effectiveness of monetary policy on the Nigerian economy.
  2. To determine whether inflationism is necessary for economic growth in Nigeria.
  3. To make recommendations based on the study.

1.4 Statement of Hypothesis

The study is designed to test the following hypothesis.

  1. H0: Naira devaluation has no impact on economic growth in Nigeria.
    H1: Naira devaluation has significant impact on economic growth in Nigeria.
  2. H0: There is no significant relationship between real GDP and currency devaluation
    H2: There is a significant relationship between real GDP and currency devaluation

1.5 Significance of the Study

The study is significant as it would add to existing literature on Naira devaluation and how it affects economic growth in Nigeria. It will serve as a guide to further research, academic work and as a self-help study material for those who might wish to firsthand knowledge about naira devaluation.

It is also hoped that Nigeria policy makers will find it’s a helpful material in the formulation and implementation of policies on devaluation of naira and how it facilities growth in Nigeria.

1.6 Scope and Limitation of the Study

The study considers the period between 1980 to 2009 for analysis. This is because we compare the economy before structural Adjustment Programme (SAP) was introduced and after the programme. Also the Structural Adjustment programme SAP in the mid-1980s The rate of exchange rose from less than the naira to one United States dollar in the pre-sap era to ₦86 to one Us dollar in 1998.

The major limitation of this study is in finding statistical data relating to devaluation of Naira. Although this problem is hoped to be overcome by improving with foreign exchange data. This is because there is a theoretical linkage between devaluation and depreciation. Devaluation deals with the fixed exchange rate while deals with floating exchange rate. Both devaluation and depreciation of currency have to same effect on the economy. The concept of devaluation though rarely practiced, requires revision in the context of prevalent problem.
The researcher encounters some constraints which limited the scope of the study;


Due to the nature of office and business within the scope, the researcher spends a lot of money on visiting, traveling from one location to another, from one office to the other and even had to repeat a visit more than three times to seek for information, all these involves money considering the financial constraint of the researcher and limited resources available to her.

Sources of Information:

Many registered and non-registered staffs of central bank of Nigeria Abuja were reluctant to give out or provide information about the research, since they believe that tax payment is something very confidential and therefore could not open up to the researcher.

Inadequate Record Keeping:

Some of the respondents visited were unable to present complete and comprehensive records of their business .while some were not keeping proper records of their business activities and as such could not give adequate and correct information on the effect of vat on their businesses rippling on the economy of Nigeria.


Time constraint has been another vital limitation and obstacle towards effective realization of the main objectives of this study. Time was really not on my side since I have to combine the little time left with my academic work and preparation.

1.8 Definition of Terms


Impact is defined as the action of one object coming forcibly into contact with another or a marked effect or influence.


The naira (sign: ₦; code: NGN) is the currency of Nigeria. It is subdivided into 100 Kobo.

The Central Bank of Nigeria (CBN):

Is the sole issuer of legal tender money throughout the Nigerian Federation. It controls the volume of money supply in the economy in order to ensure monetary and price stability. The Currency & Branch Operations Department of the CBN is in charge of currency management, through the procurement, distribution/supply, processing, reissue and disposal/disintegration of bank notes and coins.


In modern monetary policy, a devaluation is an official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate

Economic Growth:

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.


Small and medium scale enterprise. It is a non-subsidiary, independent firm which employs less than a given number of employees.

Exchange Rate:

Is the rate at which one currency will be exchanged for another


To bring (goods or services) into a country from abroad for sale.


Central Bank of Nigeria

Balance of Payment:

The balance of payments, also known as balance of international payments and abbreviated BOP, of a country is the record of all economic transactions between the residents of the country and the rest of the world in a particular period (over a quarter of a year or more commonly over a year).

Balance of Trade:

The difference in value between a country’s imports and exports.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  1. Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
  2. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
  3. Chapter three deals on the research design and methodology adopted in the study.
  4. Chapter four concentrate on the data collection and analysis and presentation of finding.
  5. Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary Conclusion and Recommendation

5.1 Introduction

It is pertinent to note that this research was aimed at examining the effect of naira depreciation on economic growth in Nigeria, thus the topic “impact of naira devaluation on economic growth in Nigeria”.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges associated with naira devaluation on economic growth in Nigeria.

5.2 Summary

The study investigated the impact of naira devaluation on economic growth in Nigeria using the record from the period between 1980 to 2009. Evidence from the empirical analyses spanning from 1980 to 2009show that exchange rate devaluation has a negative effect on Nigeria trade balance.It is therefore worthy to note that an exchange rate policy of devaluation or depreciation cannot be solely undertaken to influence Nigeria’s trade balance. The observed relation between exchange rate and trade balance has important policy implication for Nigeria; as continuous and sole devaluation/depreciation of the currency would further worsen the trade balance. This implies that policy makers need to take cognizance of the impact of exchange rate changes on trade balance in an environment where market liberalization is a topical issue in policy debates.

5.3 Conclusion

The study crossed examined the impact of naira devaluation on economic growth in Nigeria. Based on our findings, it was observed that, Nigeria’s exchange rate management policies over the period favor the continues depreciation of the Naira exchange rate, but that has not resulted to significant growth of the manufacturing sector as the contribution of the sector to GDP has continuously felled over the period. Our result therefore suggest the need for currency appreciation rather than depreciation as the sector depends heavily on the importation of equipment’s, machineries as well as most of its raw materials. The significant negative effect of interest rate on the manufacturing performance of Nigeria shows that, credit is still costly to access by the manufacturers and this contribute to the marginal performance of the sector. Both inflation and credit to private sector exert an insignificant effect in stimulating output of the manufacturing sector. The study therefore concludes that both monetary and exchange rate policies in Nigeria were not successful in achieving the growth of the manufacturing sector in Nigeria as expected. Thus, there is the need for the review of the current exchange rate policy towards appreciation and a monetary discipline that will restore the value of the naira.

5.4 Recommendations

The following were suggested by the researcher based on the findings of the study;

  1. Diversification of the economy with particular reference to agriculture to attain food security and engage Nigerians in productive ventures.
  2. Reforming the real sector with a view to giving manufacturing in the country some competitiveness while equally developing the country’s oil refining capacity.
  3. Our fiscal and monetary policies need to be active and respond to the realities of the economy.
  4. Government has the responsibility either directly or indirectly in providing the needed infrastructures to drive the economy.
  5. Encouragement of small scale industries that are self-sustaining and capable of generating auxiliary jobs for the mass of the unemployed.
  6. Finally, it is recommended that naira should not be devalued further until we improve on the quality of goods being exported through industrialization so that global competiveness will be achieved and it can have a positive effect on the balance of payment. Contractionary policies should also be put in place to curb the associated increase in inflation.

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